Brent Oil Hits Its Highest Level Since 2014 – OIR 250918

Today, we will take a quick look at some of the critical figures and
data in the energy markets this week.

We will then look at some of the key market movers early this week before
providing you with the latest analysis of the top news events taking place in
the global energy complex over the past few days. We hope you enjoy.

- The U.S. exported 913,000 bpd of gasoline in the first half
of 2018, an increase of 144,000 bpd over the same period in 2017, according to
the EIA.

- Mexico accounted for more than half of those shipments at
504,000 bpd.

- Mexico’s refineries are operating at low levels as they age
and fall apart, forcing higher levels of imports from the United States. One of
top priorities of Mexican president-elect Andres Manuel Lopez Obrador is to
breathe new life into Mexico’s downstream sector in order to eliminate import
dependence on the U.S., although it will come with a hefty price tag.

Market
Movers

- Royal
Dutch Shell’s (NYSE: RDS.A) final investment decision on a
massive LNG export terminal on Canada’s pacific coast will not be affected by
the Trans Mountain expansion chaos, according to the company. “The overall
conditions for LNG Canada to go ahead in 2018 are quite good,” Andy Calitz,
chief executive officer of the project, told the Financial Post. “That is, and
feels, so very different to 2016 when the project was delayed.”

- Shareholders of Marathon
Petroleum (NYSE: MPC) and Andeavor (NYSE: ANDV) have agreed to move forward with a merger,
which will establish the largest U.S. oil refiner.

- The Sunrise oil pipeline, owned by Plains All American (PAA, PAGP),
will begin operations on its expansion
on November 1. The pipeline will help ease the midstream bottleneck in West
Texas, adding takeaway capacity and likely reducing discounts for Midland
crude. The expansion means the pipeline will eventually be able to handle
500,000 bpd of capacity, but it was not clear how much will be available in
November.

Tuesday
September 25, 2018

Oil prices burst out of the gates on Monday with strong gains, pushing WTI over
$70 and Brent over $80 per barrel. Over the weekend, OPEC+ decided to take no
further action to increase production even as Iran continues to lose supply at
a torrid pace. Saudi Arabia said it would likely increase output in October but
declined to offer specifics. The inaction was met with fears of a supply crunch
from the market, pushing Brent up to its highest level in years. A growing
number of analysts see higher prices as likely, perhaps even as high as $100
per barrel.

Europe to establish Iran
workaround. The European Union said on Monday that it would
setup a special financial vehicle to allow Iran to evade U.S. sanctions. The
“special purpose vehicle” would allow European companies to continue to do
business with Iran while insulating them from the wrath of the U.S. Treasury.
The announcement comes as U.S. President Trump will address the UN General
Assembly this week, and the EU decision will put the two sides at odds. Iran’s
oil supply losses are mounting, and it is unclear to what extent the EU
financial vehicle will stem the tide.

Oil majors agree to reduce
methane emissions. A group of the world’s largest oil companies
agreed to lower methane emissions
from their operations over the coming years. The Oil and Gas Climate Initiative
(OGCI) calls for a reduction of methane emissions by a fifth by 2025. ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) recently
joined the initiative and said they would limit methane emissions to 0.25
percent of total production, compared to 0.32 percent in 2017. The OGCI pledge
calls for a reduction to 0.20 percent. The OGCI consists of companies
accounting for a third of global oil and gas production, and includes BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS.A),
Total (NYSE: TOT)
and national oil companies in China, Mexico, Brazil and Saudi Arabia.

Easing of U.S. methane
rules boosts marginal wells. The Trump administration is in the
midst of rolling back limits on methane emissions from the oil and gas
industry, a move that could boost small marginal wells. Stripper wells, which
produce less than 15 barrels of oil equivalent per day, could be one of the
biggest beneficiaries from the deregulation, according to S&P Global Platts. While
miniscule on their own, stripper wells collectively account for around 10
percent of U.S. oil production.

U.S. oil exports to China
hit by trade war. China has declined to put tariffs on U.S.
crude, but the trend of escalating purchases could come to an end anyway.
Unipec, the trading unit of state-owned Sinopec, has reportedly shelved plans
to increase oil imports from the United States due to the trade war. Bloomberg reports that Unipec had planned
to increase imports to 500,000 bpd next year, up from an average of 300,000 bpd
year-to-date.

Permian natural gas
discounts widen. Prices for natural gas from the Permian
plunged to new lows last week. Gas prices at the Waha hub in West Texas dropped
to a record low $0.61/MMBtu, losing $1.06/MMBtu in a single day, according to Natural Gas Intelligence. Prices
rebounded somewhat at the end of last week, but the underlying dynamic that is
crushing prices has not changed. Pipeline constraints have meant that takeaway
capacity has been essentially fully utilized for the last few months. However,
news that Southern California Gas Co., a major buyer of Texas gas, had nearly
filled its storage tanks, raised new fears of reduced purchases. The result
could be a worsening glut of gas trapped in the Permian.

Offshore oil drilling
servicers attract investors. Offshore oil rig suppliers such as
Transocean (NYSE: RIG)
and Diamond Offshore
Drilling (NYSE: DO) are attracting attention as the sector sees
a revival and share prices are relatively cheap. “So here we are in
mid-September and the trade beckons again,” Credit Suisse wrote in a note to investors.
“This time, however, we are one year closer to a recovery after 4 1/2 years of
decline, with the drilling contractors sounding more optimistic than in years,
with small, light green shoots being seen.”

S&P Global Platts
considers alternative to Brent. S&P Global Platts, which
operates the Brent crude benchmark, initiated a consultation on
Monday to assess whether the Brent benchmark should give way to other markers
as the North Sea loses some relevance. Declining production in the North Sea,
particularly from the streams that factor into Brent, has sparked a search for
alternatives.

Keystone XL clears hurdle,
could begin construction in 2019. The U.S. State Department
issued another environmental review in response to a federal judge ruling from
this summer, potentially clearing the way for the project to move forward. A
spokesman for TransCanada
(NYSE: TRP) said that construction could
begin next year.

WoodMac: Oil market in
danger of long-term supply crunch. Wood Mackenzie said in a new report that upstream
development is too sparse to satisfy demand in the years ahead. A lack of
spending, new FIDs, and new discoveries spell trouble. “A supply gap opens up
in the mid-2020s, reaching 3 million b/d by 2030, 7 million b/d by 2035 and a
formidable 12 million b/d by 2040. Barring technology breakthrough beyond what
we already assume, we’ll need new oil discoveries,” WoodMac said.

Mexico considers
state-owned natural gas company. Mexico is weighing the creation of a
state-owned company dedicated to upstream production of natural gas. The new
company would receive all the non-associated gas assets currently under Pemex’s
control.